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Question

Let:C=consumption, Ip=investment spending (as a functional of price

level), G=government spending, Tx=tax revenuw, Yd=after-tax income, Assume for a given closed economy: C=100+0.9Yd-20P, Ip=400-40P, G=300, T=100. Moreover, aggregate supply curve for this economy ia defined by the following equation P=1.41+0.0001Y. a) According to the investment equation (Ip=400-40P) as overall price level in the economy increases investment spending decreases. How could you explain this situation? Please use graphs to elaborate your answer. b) Find the equilibrum level of overall price and aggregate output in this economy. What would be the value of consumption and investment spending at this equilibrum?

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Step-by-step answer

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